medium · Market Microstructure market-impact
An institutional trader must sell 500,000 shares. Using the Almgren-Chriss framework, the trader's risk aversion λ_risk is high, resulting in a κ value of 0.05.
Compared to a TWAP trajectory, how will the optimal execution of the inventory x_k behave over the 6.5-hour trading day?
- The execution will be front-loaded, trading more aggressively in the early periods to minimize timing risk.
- The execution will be back-loaded, trading more heavily near the market close to capture volume.
- The execution will be randomized in order to prevent parasitic traders from detecting the child orders being worked.
- The execution will follow a perfectly linear path, selling exactly 76,923 shares during each hour of the trading day.
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